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XXXXX
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Sch. VI/V/15
XXXXX
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Dear Mr. XXXXX
I refer to your letter of August 11, 1992, addressed to Ivan Bastasic, and your facsimile message of April 21, 1993 addressed to Owen Newell of my staff. You requested a Goods and Services Tax (GST) Interpretation regarding the supply of natural gas by gas producers to gas aggregators where the natural gas is processed through a straddle plant prior to being exported.
On XXXXX an interpretation regarding the domestic purchase of natural gas destined for export was provided to you by the Department. The interpretation stated that "where a producer supplies gas to a marketer and, subsequent to that acquisition, the gas is diverted through a straddle plant, the activity of removing the non-methane components of the gas, such as ethane, propane and butane in the straddle plant must be considered to be processing of the gas acquired and such processing cannot be considered to be reasonably necessary or incidental to the transportation of the gas." You have been accounting for the GST in accordance with the interpretation provided.
In your letter of August 11, 1992, you reiterated that such application of the GST to the purchase of natural gas destined for the export market has created an unnecessary cash flow burden for gas exporters and particularly gas aggregators.
Further, you explained that all XXXXX gas is made available to straddle plants near the XXXXX border where the composition of the gas is altered, and the processing is neither necessary for, nor incidental to its transportation. Despite this fact, you continue to be of the opinion that gas purchased domestically for export to the U.S. should be zero-rated regardless of whether or not it is diverted through a straddle plant prior to its exportation.
It is your understanding that a gas aggregator in XXXXX has been supplied with a ruling allowing its purchases of domestic gas to be zero-rated. You are in agreement with that ruling.
In XXXXX gas is processed at or near the point of production. During this process a number of by-products are removed from the natural gas stream. This process involves the removal of natural gas liquids (NGL's) and impurities in order to meet pipeline quality specifications in a one-step process. Where no further processing takes place after this initial stage, the Department determined that the domestic purchase could be zero-rated to the extent the gas was destined for export. You contend that your situation is identical to that of the XXXXX gas aggregator.
Our understanding of the facts is as follows:
Statement of Facts
1. XXXXX is an aggregator of natural gas in XXXXX
• XXXXX purchases natural gas upstream of straddle plants where, subsequent to processing to remove NGL's, such as ethane, butane, propane and pentane, the natural gas is transported and sold on either the domestic or export market.
2. With respect to the processing of natural gas near the XXXXX border, XXXXX has no ownership interest in the sale of the extracted liquids. After NGL's have been removed at the straddle plant, XXXXX must receive the same energy content downstream of the plant as it purchased from producers and delivered to the plant. The plant operator accomplishes this by putting additional natural gas through the straddle plant to make up for the heat value lost through the extraction of the NGL's from the XXXXX gas stream.
3. The fact that the composition of the gas is altered by the removal of NGL's is of no consequence to XXXXX or to the commercial nature of the sale of the gas to its U.S. export customers. Further, the XXXXX government, understanding the importance of NGL's to its' petrochemical industry, requires exporters of XXXXX gas to allow for the removal of NGL's when calculating the volume of gas to be applied for under the removal permit regulations of the XXXXX[.]
4. The Department met with representatives of the oil and gas industry in September, 1993. At that time the subject of straddle plants was discussed. The Department was advised on the current status of gas processing in XXXXX
a) In XXXXX natural gas is processed at primary processing plants (field locations) to remove contaminants, such as hydrogen sulphide and water. The natural gas is then shipped by pipeline to secondary processing plants (referred to as straddle plants by the industry) to remove the NGL's, such as ethane, butane, propane and pentane. The removal of these non-methane by-products is undertaken to provide feedstock to the petrochemical industry in XXXXX and not for transportation purposes. After the NGL's are removed, the pipeline quality natural gas (which is essentially methane) is replenished by an equivalent amount of methane and then exported to the non-residents.
b) The information provided to the Department on which the Department's previous interpretations to XXXXX aggregators were based was that the natural gas is only processed at primary processing plants (i.e., field locations) where contaminants, such as water and hydrogen sulphide, and NGL's are removed. We were further advised that the pipeline operator in XXXXX will not accept natural gas into its transportation system unless the gas has been processed to remove the contaminants and NGL's.
c) The Department has now been advised that, XXXXX the natural gas is not only being processed at primary processing plants (i.e., field locations) where contaminants and NGL's are removed, but that the natural gas may be shipped to a straddle plant where additional NGL's are removed. After processing at the straddle plant, the pipeline quality natural gas (which is essentially methane) is replenished with an equivalent amount of methane and then exported to the non-residents.
Interpretation
As the removal of the NGL's at the straddle plants in XXXXX is not considered incidental or reasonably necessary for the transportation of the natural gas, the supplies by the natural gas producers to the aggregators, where the gas is subsequently diverted through a straddle plant, may not be zero-rated under Schedule VI, Part V, section 15 to the Act. This interpretation is consistent with interpretations previously provided to the oil and gas industry in XXXXX[.] In XXXXX, the removal of the contaminants and NGL's at the primary processing plant is considered incidental or reasonably necessary for the transportation. Consequently, the supplies of natural gas by the producers to the aggregators may be zero-rated under Schedule VI, Part V, section 15 providing that the gas is not further processed at a straddle plant.
As in the XXXXX case, the removal of the additional NGL's in XXXXX at the straddle plant (i.e., secondary processing) is not considered incidental nor reasonably necessary for the transportation of the gas. Therefore, in those instances in XXXXX where the natural gas is not exported directly, but goes through the straddle plant for additional processing, the supplies by the natural gas producers may not be zero-rated under Schedule VI, Part V, section 15.
Aggregators in XXXXX have expressed concern that they are at a disadvantage to aggregators in XXXXX because of the cash flow problem caused by not being allowed to acquire natural gas destined for export on a zero-rated basis. However, the disadvantage to aggregators in XXXXX in relation to aggregators in XXXXX, will only occur in those instances where the natural gas produced in XXXXX by-passes the straddle plant and is exported directly.
The Department has been advised that, in XXXXX non-residents are now by-passing aggregators and dealing directly with producers. The supplies of natural gas by producers to non-residents, where the non-residents by-pass the aggregators, may be deemed to be made outside Canada under subsection 179(2) of the Act, and thus not subject to GST. In order to qualify under this provision, the non-residents cannot be registered for GST purposes and the straddle plant operators must furnish the registered natural gas producers with a drop-shipment certificate. We are not aware of similar practices taking place in XXXXX[.]
A change in the legislation to zero-rate the supplies of natural gas to XXXXX and XXXXX gas aggregators, where the supplies are made prior to the processing of the gas at straddle plants, is a tax policy matter. Tax policy matters are the responsibility of the Department of Finance. XXXXX[.]
This interpretation is based upon our current understanding of the Act and regulations thereunder in their present form. The interpretation does not take into account the effects of any proposed or future amendments thereto or future changes in interpretation.
While we trust that our comments are of assistance to you, we would advise that they do not constitute a GST ruling and are, therefore, not binding upon the Department in respect of any particular fact situation.
Should you require any further clarification, please contact Owen Newell of my staff at (613) 954-4280.
Yours sincerely,
H.L. Jones
Director
General Tax Policy
Policy and Legislation
Excise/GST
GTP
The following is further to your request dated April 6, 1993 for our comments with respect to the draft response prepared for XXXXX) on the above-referenced matter. We apologize for the delay in providing you with our response.
The draft response to XXXXX addresses the issue of whether a factoring company is required to obtain a clearance certificate prior to collecting amounts in relation to accounts receivable which have been purchased by them. The right to collect these amounts has been assigned to the factoring company by the original vendor/supplier. XXXXX has questioned whether or not the factoring company would fall into the definition of "assignee or other like person" pursuant to the provisions of subsection 270(1) of the Excise Tax Act.
It is important to note that the Minister of Finance announced on December 9, 1992 proposed amendments to section 270 of the Act. These proposed amendments were subsequently enacted on June 10, 1993. As such, the draft response should be altered to reflect these amendments which apply to distributions made after 1992.
As indicated in your draft response, subsection 270(1) of the Act requires a representative, under certain circumstances, to obtain a certificate before distributing certain property. The amendments to section 270 of the Act provide that, with respect to distributions made after 1992, representatives will also be required to obtain certificates prior to the distribution of money.
On page three of the draft response, reference is made to "... our belief that factoring means ...". We would recommend that reference be made to the definition of "factoring" contained in GST Technical Information Bulletin B-060 entitled "Listing of Taxable, Exempt and Zero-Rated Products and Services of a Deposit-Taking Financial Institution["]. Item E-1209, of Part II (Exempt Products and Services) of the TIB, provides the following description for the word "factoring":
"... performs the credit and collection function for a customer who sells or transfers title to its accounts receivable.".
We concur that the recipient who acquired an account receivable by way of sale does not fall within the provisions of section 270 of the Act.
With respect to the draft responses for the secondary questions, we provide the following comments.
Secondary Question 1
Whether or not the factor is responsible for remitting the GST collected on an account receivable depends on the circumstances of the particular situation.
Subsection 222(1) of the Act stipulates that amounts collected as or on account of GST are deemed to be held in trust for Her Majesty. Subsection 225 of the Act requires that such amounts be included in the person's net tax calculation.
Where the factor is collecting amounts as or on account of GST, the legislation stipulates that those amounts are required to be held in trust and included in the factor's net tax calculation. However, for administrative purposes, if there is evidence that the supplier has accounted for the GST collectible and remitted net tax, the Department would consider that the factor's obligation to account for the tax has been met. However, the Department reserves the right to pursue either the supplier or the factor for the amount of GST collectible.
Secondary Question 2
We concur that the GST registration number of the supplier (referred to as original vendor/supplier) should be recorded on the invoice and maintained by the purchaser for purposes of claiming an input tax credit.
We trust that the above comments are satisfactory. For additional information please do not hesitate to contact Dave Caron, Manager, Administration and Enforcement Provisions at 952-0301 or Marcel R. Boivin at 952-8814.
H.L. Jones
Director General
Tax Policy
Policy and Legislation
Excise/GST
XXXXX
c.c.: M. Boivin
Clearance Certificates:
It is proposed that section 270 be amended to provide that for the purposes of that section "property" would include money.
It is also proposed that the section be amended to provide that receivers (as newly defined in section 266(1)) no longer be required to obtain a certificate from the Minister of National Revenue certifying that all amounts that are payable or remittable by the person in receivership have been paid or that security for the payment or remittance of the amounts has been accepted by the Minister. Receivers would continue to be required to obtain clearance certificates in respect of amounts for which they are liable or can be expected to become liable under section 266 prior to distributing property or money of the person in receivership.
These amendments would apply to distributions made after 1992.
Department of Finance PRESS RELEASE Ottawa, December 9, 1992
GST LEGISLATION INTRODUCED
Finance Minister Don Mazankowski today introduced in the House of Commons a detailed Ways and Means Motion proposing amendments to the Goods and Services Tax (GST). The Ways and Means Motion incorporates the draft GST legislation which was released by the Minister on September 30, 1992 and reflects technical modifications resulting from consultation on the draft legislation.
Mr. Mazankowski indicated that the proposed amendments will improve the operation of the GST and are the result of extensive consultation with individuals, businesses and their tax advisors. The Minister said, "The comments received in written submissions and in meetings with various organizations were well thought out and constructive. I would like to thank all those who took the time to review the draft legislation and to provide us with their comments."
A number of changes to the draft legislation are made in the Ways and Means Motion. Most are minor technical changes which do not affect the policy expressed in the draft legislation. Some of the changes are more substantive in nature, including refinements to the rules dealing with the sale of a business and the rules relating to insolvencies.
A backgrounder outlining these and other changes is attached.
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